The European Union and the United States were teetering on the brink of a transatlantic trade war last night after Brussels threatened a $2.2bn package of sanctions unless Washington scrapped steel tariffs ruled illegal by the World Trade Organisation yesterday.

Brussels claimed victory in its fight to force President George Bush to drop measures aimed at shoring up his political support in America's industrial heartlands, but the US said it would appeal against the decision.

The world's two biggest trading blocks are already at loggerheads over Europe's anti-GM foods regime and America's tax breaks for multinationals.

Yesterday's ruling comes as EU and US negotiators are attempting to settle their differences in the global trade liberalisation talks.

A WTO disputes panel said American import tariffs of up to 30% on foreign steel could not be justified under global trade rules and that they should be abandoned as soon as possible.

Within minutes, the European commission said it would seek to hit pre-selected US products with retaliatory tariffs worth up to $2.2bn (£1.3bn) a year unless Washington dismantled its offending steel tariffs within five days.

"If and when the US does not comply with this ruling, the EU will impose counter measures," said Arancha Gonzalez, a spokeswoman for EU trade commissioner Pascal Lamy.

She said the sanctions, if used, would hit US steel products, textiles and fruit and vegetables.

"We would like to urge the United States to look at the wider picture - all the world's steel exporters are telling them to remove these tariffs. This is not just a partial victory - it is a full victory. The US has been caught red-handed."

The WTO appeared to side with the EU and fellow complainants Japan, Korea, China, Switzerland, Norway, New Zealand and Brazil on every front.

The trade watchdog said the US tariffs, announced by President Bush last March, were in breach of global trade rules in every category.

The US had argued they were necessary to help America's steel industry recover from a wave of cheap Asian and European imports, but the WTO said it had found little evidence to show foreign imports had dramatically increased.

Washington also contended that its hand had been forced by sudden and unforeseen circumstances, but again the WTO disagreed.

Nor did it concur US steel producers had suffered any major economic injury because of alleged floods of foreign imports.

US trade representative spokesman Richard Mills said: "Where the panel found against the United States, we disagree, and we will appeal. In the meantime, the steel safeguard measures will remain in place."

Washington now has 60 days to appeal the ruling, and may delay doing so until the last moment in an attempt to defuse some of the tension ahead of the WTO ministerial meeting in Cancun, Mexico, in September.

Ms Gonzalez struck one conciliatory note when she said the commission remained ready, despite the dispute, to work constructively with the US and the OECD to tackle what she called the real problems affecting the US steel industry - global overcapacity and domestic subsidies.

To rub salt in Washington's wounds, the WTO also stated that an American decision to exclude preferred trading partners Canada, Mexico, Israel and Jordan from the offending tariffs flew in the face of its rules.